Hillenbrand Inc (HI) 2009 Q3 法說會逐字稿

Good morning, everyone. Welcome to Hillenbrand's earnings call for the third quarter of 2009. Today's conference is being recorded and will be available for replay through midnight Eastern time Wednesday, August 26, 2009, domestically at 888-203-1112 and internationally at 719-457-0820, for the replay callers will need to use confirmation code 6524514. If you are unable to listen to the live audio only webcast it will be archived at www.HillenbrandInc.com through August 11, 2010.

If you choose to ask a question today it will be included in any future use of this recording. Also note that any recording transcript or other transmission of the text or audio is not permitted without Hillenbrand's written consent.

Now at this time it's my pleasure to turn the conference over to Mark Lanning, Treasurer, and Vice President and Investor Relations.

Thank you, and good morning everyone. Welcome to our third quarter earnings call. With me today are Hillenbrand President and Chief Executive Officer, Ken Camp; Batesville Casket President and Chief Operating Officer Joe Raver; and Hillenbrand Chief Financial Officer, Cindy Lucchese.

During the course of today's conference call and the question and answer session that follows, we may make projections or other forward-looking statements that are subject to the Safe Harbor provision of the securities laws regarding future events or the performance of the Company. We caution you that these statements are only our view of the future and that actual results may differ materially. We also alert you to the risks described in the documents that we file with the Securities and Exchange Commission such as our annual and quarterly reports on Forms 10-K and 10-Q. We do not undertake any obligations to update or correct any forward-looking statements.

Now let me provide some information regarding our call. We have scheduled one hour and we'll start with prepared remarks that should last approximately 20 minutes. We will then move directly to Q&A. If you have follow-up questions after the call has ended please don't hesitate to call me at 812-934-7256 or e-mail me at MrLanning@hillenbrand.com. Now it's my pleasure to turn the call over to Ken Camp, Hillenbrand's President and CEO. Ken?

Thanks, Mark. Hello everyone and thank you for joining us this morning. As Mark mentioned also joining us on the call today is Joe Raver, President of Batesville Casket Company. Some of you first met Joe at our investor conference in New York last December and for those of you who have not yet met him he has a great deal of experience with us. Joe has spent more than 14 years with Hillenbrand, about 10 of which have been with Batesville Casket Company in a variety of leadership assignments. During today's call, I'll start with a brief overview of our performance for the third quarter of this fiscal year which ended June 30. Then I'll turn the call over to Joe to discuss the current state of the funeral services industry and Batesville casket Company's response to those changing conditions. Cindy Lucchese will then provide details about our quarterly financial results after which I'll wrap up the prepared portion of the call, then Joe and Cindy, Mark and I will be available to take your questions.

As you can see by this mornings press release, our third quarter net revenue declined 3.8% compared with the third quarter of 2008. Although this is an encouraging improvement over the 10.8% decrease we reported in the second quarter, we continue to see some negative effects of the revenue line. This was the result of continuing lower debt numbers, a higher than expected increase in cremation rates and cautious spending on the part of consumers and some of our customers. On the plus side, we also experienced some favorable rates for the purchase of fuel and some raw materials, particularly when compared with the unusually high prices we saw for these items at the same time last year. These effects when coupled with Batesville's never ending and far reaching work to achieve productivity improvements throughout the Company yielded a gross margin improvement of 140 basis points.

As a result of these items and other offsetting factors, earnings per share decreased 2.4% going for $0.42 a share from $0.41. As most of you know, we manage the business for predictable and sustainable cash flow, and while that can be a significant challenge in these volatile times, cash flow from operations remains strong at $33.3 million in the third quarter. Excluding a $7.8 million voluntary contribution to our pension plan in June, cash flow remains stable year-over-year. We also paid a quarterly cash dividend of $0.185 per share in June which reflects an annual dividend rate of $0.74 a share.

Before I turn the discussion over to Joe, I want to update you on the latest information regarding the nearly four year old anti-trust litigation we've discussed in previous calls. In late April, the US District Court for the Southern District of Texas ordered the dismissal of the suit filed against us and others by Pioneer Valley Casket Company and three other independent casket retailers. These plaintiffs dismissed their complaint against our Company and the other defendants in the case with prejudice, meaning that they cannot refile that same case again. Both plaintiffs and defendants were responsible for their own legal expenses so no money has or will change hands between the parties. That case is done.

In the other case referred to as the Funeral Consumers Alliance case, the plaintiffs have had their requests for class certification denied at several steps in the judicial process. The FCA plaintiffs then filed a request asking the three judge panel for the Court of Appeals to reconsider its decision and to ask all of the judges on the Appeals Court for their opinions regarding the panels ruling. On July 29, the Court of Appeals denied both of those requests. If the plaintiffs choose to continue the class action journey, they may still file with the US Supreme Court seeking to have the highest court in the land potentially review their case. For those who want more information I invite you to read our previous 10-K and various 10-Q's where we cover this subject in excruciating detail.

Finally, we found out Monday night that the District Court for the Eastern District of Arkansas denied class certification in the Clayton lawsuit, a separate piece of litigation, which is also discussed in our public filings. In this suit, the plaintiffs asserted a number of claims related to Batesville's warranties on our gasketed caskets. The plaintiffs now have several options. They can petition the Court of Appeals to hear an appeal on the denial of class certification. They may pursue individual claims or they could seek to dismiss the case. While we recognize that we all live in a litigious society and that lawsuits are just part of business life, we're very pleased with the results in all these cases and will continue to defend against challenges to the integrity of our brand. I'll now turn the presentation over to Joe Raver.

Thanks, Ken and good morning to everyone. I'd like to begin by briefly discussing some of the major trends in the funeral services industry including the current economic recession and the impact of those trends on our business. First, the number of deaths in North America appears to have declined approximately 2.3% in the third quarter compared to the same period last year. Typically, once influenza and pneumonia season has run its course the number of deaths returns to consistent year-over-year levels, so it's unusual to see a decline of this magnitude in the third quarter. In addition to the lower number of deaths the cremation rate appears to have grown more than in past years. Historically, creations have grown at a pretty consistent rate of about 120 basis points per year. For the second and third quarters, our internal analysis shows this rate may have been above 200 basis points. Many of our customers and subpublished articles have indicated that a significant portion of the increase is the direct result of the economy.

As we look for patterns that might allow us to anticipate future cremation rates we observed two instances in the past where the rates spiked. In each case, the rate returned to typical annual increases. While these may be indicators, we can't predict with any certainty how consumers will respond given the current economic conditions. The combined effect of lower deaths and higher than anticipated cremations has made this a very difficult burial market through the third quarter.

Another important consideration affecting not just volume but mix is the aggressive pricing and competition in our industry. A number of small distributors have made a play to reduce prices to gain volume primarily in the lower casket price points. After feeling the effects of this play in the second quarter, we were successful in using targeted sales campaigns to regain our relative competitive position this quarter. Our short-term actions to regain lost volume were successful but they also produced a dilutive effect on mix. This effect combined with the cautious buying patterns of consumers is reflected in our softer revenue results for the quarter.

One of the most positive tools we have to improve sales mix for our customers and our Company is the Batesville Merchandising System. Despite the attention our sales representatives devoted to responding to the intense competitive environment, we continue our steady progress in implementing these systems which help our customers achieve better financial results while satisfying their client families.

In summary this has been among the most challenging times we faced at Batesville Casket with low death rates, increasing cremation rates and a fierce competitive environment. We expect these challenges will remain at least as long as the current economic conditions persist. But we're continuing to keep a close eye on the key drivers of our industry including the effects of the economy. We're committed to protecting our relative market position and we'll respond as needed to provide superior value to our customers. Now I'd like to turn the discussion over to our CFO,Cindy Lucchese.

Thank you, Joe. I'd like to provide some additional detail and perspective behind our third quarter results. Net revenues for the quarter were $158.7 million a decrease of $6.3 million or 3.8% from the same period in the prior year. The primary driver was a 4.7% decrease in burial unit volumes compared to the prior year which we believe is the result of fewer North American deaths compounded by an accelerated number of cremations. The unfavorable effect of downward product mix reduced revenues by $4.9 million over prior year but was partially offset by an increased average selling price. We also continued to experience unfavorable fluctuations in foreign exchange which reduced revenue by $1.8 million over the same period in 2008.

Our gross profit margin percentage of 41.6% was an increase of 140 basis points over the 40.2% we posted in the third quarter of 2008. Cost of goods sold played an important part in this improvement, decreasing $5.9 million over the prior year. Commodity costs most notably in carbon and stainless steel were down $1.5 million compared with the same time last year and lower fuel costs contributed an additional $1.9 million to the decrease in the cost of distribution operations for the same period. Operating expenses for the third quarter of $27.3 million improved 3.9% over 2008, excluding one-time separation costs.

Two factors were primary contributors to this improvement. We had a reduction in variable compensation expense and a $600,000 reduction in legal fees related to the anti-trust lawsuit. We incurred approximately $300,000 in interest expense for the quarter, down $1.1 million from the $1.4 million in the prior year. Our outstanding borrowings on our $400 million revolver were $80 million as of June 30, at an average interest rate of 0.8%.

We also recorded $1.9 million in investments in other income down from $4.4 million in the same period in 2008. We had an additional writedown of $1.2 million this quarter related to our limited partnership investment. These losses resulted from a decrease in the fair value of their investment portfolios and may continue to be affected by the economic climate. You may remember we recorded $4.5 million in the second quarter related to these investments bringing our total writedowns to $5.7 million on a year-to-date basis. The carrying value of these investments on our books is currently $14.9 million.

I'd also like to remind you that these investments are unpredictable and volatile and they are not included in our guidance estimates. Our tax rate for the third quarter was 36.8% which was 1.9% higher than the 34.9% incurred in the prior year. This is attributable to lower tax exempt interest income and higher sales income tax rates. Year-to-date, our effective tax rate is 2.1% lower than in the prior year, primarily due to non-deductible separation costs incurred in fiscal 2008.

Net income for the quarter was $25.4 million or $0.41 per fully dilute the share down from $26.7 million or $0.42 per share in the prior year. Earnings per share decreased 2.4% while net income decreased slightly more at 4.9%. This difference is due to the reduction in the average common shares outstanding as a result of our share repurchases during the year. Cash flows from operations were $33.3 million versus $41.3 million in the same period last year. This decrease was primarily the result of a $7.8 million voluntary contribution we made to our pension plan in June.

Finally I'd like to give you an update on our guidance. Because there is still significant uncertainty about the economy, it's more difficult than usual to accurately forecast future results. Even so, we anticipate that annual results will be within previously announced guidance although closer to the lower end of the range. I would also like to highlight a few points.

Given the recent good news regarding the anti-trust case, it's likely our expenses for this litigation will be lower than we anticipated even a few months ago. Further, the potential for additional writedowns in the value of our private equity investments is not reflected in our guidance. Now we'll turn the call back to Ken for his concluding remarks. Ken?

Thanks, Cindy. It seems we've talked a lot about the recession and I guess everyone is talking about it and it's certainly on the minds of our customers and consumers, and because there is uncertainty around improvements or certainly timing thereof in the economy it's critical that we be flexible so we can respond directly and effectively to competitive actions or to potential changes in the way consumers make decisions. The entire Hillenbrand team is working diligently to increase productivity and create new ways to meet the needs of our customers and their client families. We have a stable financial foundation and will continue to build on it with prudent investments both in our core business and in broader opportunities that will position us for the future. We thank all of you for joining us on the call today and now we will be glad to take questions. Operator?

Thank you. (Operator Instructions) We'll go first to Jamie Clement of Sidoti & Company. Good morning.

Good morning, Jamie.

Ken, was wondering if you can help -- go into a little bit more detail on how you see the trade down phenomenon in your industry impacting your results, like it sounds as if you thought your market share was better here in the June quarter in the lower price point casket range kind of creating a natural kind of mix shift downward but absent that, what are you hearing from your customers or what did you hear from your customers with respect to families trading down in the March quarter versus in the June quarter? I mean your revenue numbers year-over-year looked better this quarter.

Good question, complicated answer, because it really depends upon a lot of opinions and what I'm going to mix in there is I'll respond to what customers are telling us and then also the results that we've seen in our merchandise firms, and Joe can certainly participate in that. As you know, we bring a lot of customers in here and Joe and I spend an awful lot of time talking to them. I'd summarize what we're hearing it's that families are somewhat uncertain. They obviously aren't used to arranging funerals when they come in. Money is on their mind, and funeral directors being caregivers in a great many cases sometimes just go for the cheapest alternative, which may or may not satisfy the family but that's what many funeral operators are telling us, is that they are trying to make sure that families aren't stretched. It has the potential in some locations to be a self-fulfilling prophecy so when we look at those customers that really practice, use the Batesville Merchandising System and those that do not, there's a big difference in how they are weathering this economy, and while we don't give out all the dollar details of merchandise firms, I can tell you if we just look year-to-date through June and we say that all the volume was down about 4% which we've stated to a large number, you look at firms that buy from us but they may not buy much or they are low end focused but they don't follow a merchandising plan. They were down during that period 16%.

Wow.

If you look at those that were merchandised at the three levels, we kind of have the good, better, best level that they've progressed through, that entire group was up and I'm kind of averaging some numbers here, in the 5% range and the ones that use the most effective form of merchandising, that progressed the farthest were up 8%. So there's a real big difference.

And Ken is that versus last year or is that versus the March quarter?

Versus last year.

Okay.

And that was a year-to-date number as well so that's got some different, a very difficult quarter which was Q2 and a much better quarter which is Q3. Q1 was very good by the way, before the collapse of the economy, so what we read from that is that the practice of merchandising while it's difficult and not every funeral director wants to do it really does work, so we take that as an indicator although it's a secondary indicator but an indicator of how consumers will respond if they're given information and they see value.

And Ken, you don't have to run through all of the numbers and maybe they aren't handy but the numbers that you gave for the merchandise customers being up, were those trends more positive in the June quarter than they were in the March quarter for you all?

Jamie, it's Joe. I would tell you that we saw a significant decline in mix in our second quarter as we went to win volume and that has moderated in the third quarter. It has not returned to previous levels.

Of course not.

But we're not seeing that trend continue where mix is dropping pretty quickly, which it's really flattened out and it's been, average selling price has been slightly positive as we've moved through the third quarter.

Okay, thank you very much for your time. I'll get back in the queue.

Our next question comes from Steve O'Neil of Hilliard, Lyons.

Good morning. Just wondered if you could give me the number of pricing, you mentioned $4.9 million negative mix effect partially offset by higher prices. Do you have a number for that or is that something you can disclose?

Good morning, Steve. Let me handle that. Basically from a revenue standpoint, volume was a negative $9.1 million, in addition to that mix was another $4.8 million negative and then the foreign currency impact, $1.8 million negative all offset by price which was $9.4 million unfavorable.

Okay. And you covered some of this in the last question, but could you elaborate a bit more on your targeted sales campaign that helped you win back some volume?

Sure. This is Joe. As we saw some -- the smaller competitors use price to try to win volume particularly at the low end of the product line, in the second quarter we launched a number of sales campaigns that were very targeted so they were targeted at specific products and customers and then we set targets for our sales representatives to go put those campaigns in front of customers. We feel like we got good traction with those campaigns and you can see that in the third quarter we did much better relative to the market than we did in the second quarter, so we feel good about those campaigns related to volume.

Would that be mainly through the use of the Northstar brand?

No. The Northstar brand is a non-Batesville branded line of caskets. Those are--.

Oh, okay.

Those are commercial designs, they are kind of generic caskets. They don't have any of the Batesville features, no Batesville warranty and they are sold to distributors who then in turn sell to funeral homes.

You would have been referring to lower price point Batesville brand than in the targeted sales campaign?

That's correct. The lower price point Batesville branded products.

And last question just for modeling purposes you've been bringing down other operating expenses through the year and of course your legal costs have been favorable. Can you give me any direction or guidance at all as far as what we might look for for in the fourth quarter either as a percentage or somewhere close to the level of the first three quarters, just for some information on that area?

From an operating expense standpoint, Steve, there's nothing that we see in the fourth quarter that's going to be largely different from any of the other quarters you've seen. I think the key thing is really and this is below the line, this would be the OIE line. It's really those private equity investments where we see the most potential for something to occur but I think everything else should be pretty level with what you've been seeing.

Okay, thank you very much.

(Operator Instructions) Our next question today comes from Jack Ripsteen of P-Cap..

Hi, good morning. Thanks for taking my call. Just curious in this environment if you give us an update on the M&A front, you guys had spoken about at the analyst day and if you're seeing things that are appropriately priced or if that's just on hold until the economy gets on better footing? Any update would be appreciated.

This is Ken, Jack. I can tell you what we're seeing there. Of course we don't talk about anything that we may or may not be making progress on. Generally, with the economic conditions affecting so many companies what we're finding is companies that are struggling are eager to be sold but we're not necessarily eager to buy something like that. Other companies that are good solid companies kind of more in our target sweet spot of you will, we think have been a bit on the sidelines in this sense. Most people have multiples in their mind that would determine the value of a Company and the good companies don't want to sell off of the multiples that were driven by '08 and '09 results. They like to have multiples in '07 so what we're seeing in a great many cases is they are saying we would really, we want to wait until things get a little better post-economy. That doesn't say that something can't be accomplished and we continue to work very diligently at this, but as we said earlier we want to be prudent. We want to do a good acquisition at the right time and fast is not nearly important as good.

Okay, but you're not changing your overall strategy because of the economy, you're just moving forward at your own pace?

That's exactly right. The strategy we put out before is still in place.

Great. Thank you.

Yes, sir.

(Operator Instructions) With no further questions in queue I'd like to turn the conference back over to Mark Lanning for additional or closing remarks.

Thank you, conference Operator. That concludes our call for today, and we appreciate everyone joining the call and if you have further questions please give us a call. Thank you very much.

And that does conclude today's conference, ladies and gentlemen. Again we appreciate everyone's participation today.